Dr. Barry Haworth
University of Louisville
Department of Economics
Honors Econ 201-01

M/W 11:00-12:15pm

 

 

 

Homework #2 (due by 9:00pm on Thursday, February 9)

 

 

 

Please submit your answers to this homework through the assignment link on Blackboard.  No credit will be given for answers submitted in class or emailed to me.

 

To access this homework on Blackboard, do the following.  After logging into Blackboard, check “Assignments” for this class.  You should see a link that says “Homework #2”.  By clicking on this link, you should be able to start answering the homework questions.  When you are done, you may submit your answers, but once answers have been submitted – you cannot go back and change anything.  If you don’t finish, then it’s possible to save your answers and submit them later – just remember that anything submitted after the due date is considered late.

 

Questions 3 and 8
Your answers in the first three parts of question #3 and both parts of question #8 involve your calculating a value.  When submitting your answer, understand that your answer can be "technically correct" but graded as "wrong" because you didn't follow directions.  For grading purposes, a wrong answer is still be considered wrong - even if your mistake is "only" a result of not following directions.
 
In that regard, please note the following comments below.
   (i) If you get a fraction for your answer, you can either leave the fraction as is or you can put your answer in decimal form (i.e. you can record your answer as 2/5 or 0.4).
   (ii) If you record your answer as a fraction, then you must reduce that fraction to its simplest form (e.g. record your answer as 2/5 instead of 4/10).
   (iii) Except for 0.25 and 0.75, all other decimals should be rounded to the nearest 10th (e.g. 0.1 or 3.4, rather than 0.12 or 3.35).
   (iv) If your answer is 0.25 or 0.75 (only), then record it as 0.25 or 0.75.  You do not need to round your answer up to 0.3 or 0.8 respectively.
   (v) On question #8, the price can be expressed in terms of dollars or just as a numerical value (e.g. ten dollars can be stated as $10.00 or as 10.00).
If you have any questions about the comments in i-v above, then please ask them before submitting your homework for grading.  Once homework is submitted, however, it's too late to make any changes.  Note that you can save incomplete homework, come back to access it later on and then complete it before officially submitting the homework for grading.
 
 

 

 

1. Consider the Louisville-area market for sandwiches (e.g. similar to what’s sold at Subway or Quizno’s) and assume that this market can be described by demand and supply curves who represent a large number of buyers and sellers.  For convenience, we’ll assume that sandwiches are all essentially the same, but that sandwiches are considered a healthy alternative to fast food (e.g. hamburgers).

You must identify how different events affect this market by matching each event (listed under “Events” below) to the item which represents the most likely effect on the market for sandwiches.

 

Events:

 

Effect on Louisville-area Market for Sandwiches:

a. Increase in the wages paid to employees at sandwich

shops, fast food restaurants, etc.

 

A. Increase (shift right) in Demand for sandwiches

b. Increase in consumer income

 

B.  Decrease (shift left) in Demand for sandwiches

c. Sharp decrease in the price of hamburgers and salads

 

C.  Increase (shift right) in Supply of sandwiches

d. Increased automation in the sale of sandwiches leads to an

increase in the productivity of sandwich-making

 

D. Decrease (shift left) in Supply of sandwiches

e. Less regulation in all food-service industries lowers the cost

of producing sandwiches

 

E.  Increase (shift right) in Demand for sandwiches and

Increase (shift right) in Supply of sandwiches

f. Increase in government-sponsored advertising about the

health-related consequences of eating fast food

 

F.   Decrease (shift left) in Demand for sandwiches and

Decrease (shift left) in Supply of sandwiches

g. Government taxes the suppliers of sandwiches, a tax

that’s paid whenever sandwiches are sold

 

G. Increase (shift right) in Demand for sandwiches and

Decrease (shift left) in Supply of sandwiches

 

 

H. Decrease (shift left) in Demand for sandwiches and

Increase (shift right) in Supply of sandwiches

 

 

This next question relates to how we explain changes in price and quantity on the basis of the demand and supply model from class.  The question should be taken generally, and does not necessarily relate to the market discussed above.  The one important assumption here is that we assume the demand and supply curves in this market are not horizontal or vertical (i.e. that these curves have their "typical" slope).

 

2. Match the change in equilibrium on the left with the shift(s) on the right that best explains that change.  E.g., if you believe that an increase in equilibrium price and quantity (left) is best explained by a decrease in supply (right), then you would match those two.

 

 

a.  P* increases and Q* decreases

A.  Increase in demand

b.  P* decreases and Q* decreases

B.  Decrease in demand

c.  P* increases and Q* increases

C.  Increase in supply

d.  P* decreases and Q* increases

D.  Decrease in supply

 

E.  Increase in demand and increase in supply

 

F.  Decrease in demand and decrease in supply

 

G.  Increase in demand and decrease in supply

 

H.  Decrease in demand and increase in supply

                                                                                   

                                                                                   

 

3. Assume that researchers determine the following information about good X, in terms of how the quantity demanded for good X is affected by changes in specific variables.

·         When the price of good X increases by 5%, the quantity demanded for good X decreases by 10%

·         When consumer income increases by 8%, the quantity demanded for good X increases by 2%

·         When the price of a related good (e.g. good W) increases by 6%, the quantity demanded for good X decreases by 2%

·         When suppliers of good X spend 2% more on advertising for good X, the quantity demanded for good X increases by 3%

 

Use the information above to answer parts a, b and c below (please read the instructions above about rounding your answer in Question #3). Note that it's not necessary to include % in your answer or indicate that a number is positive by including "+" before the number.  If applicable, you do need to indicate whether a number is negative (i.e. include "-" in front of any negative number to indicate that it's a negative number).

a. What is the (own) price elasticity of good X?

b. What is the income elasticity of good X?

c. What is the cross price elasticity of good X?

 

4. When looking at the information given in the question above (i.e. #3) it is possible to characterize good X in terms of whether it is a normal good, inferior good, substitute for good W, complement to good W, etc.  In the responses given below, check all correct responses when it comes to characterizing good X in the manner described above.  E.g., based on the information from Question 3, if you think Good X is an inferior good, a luxury, and also a substitute for good W, then you would check those three boxes below.  Note that your answer to this question is either completely correct or it’s incorrect.  I.e., there is no partial credit on this one.

 

□   The demand for good X is inelastic

□   The demand for good X is elastic

□   The demand for good X is "unit elastic"

□   Good X and good W are not related goods

□   Good X and good W are substitutes

□   Good X and good W are complements

□   Good X is a normal good

□   Good X is an inferior good

□   Good X is a necessity

□   Good X is a luxury


 

 

Go to the US Department of Agriculture website where the estimates from various studies of demand-related elasticities are posted.  You’ll be accessing three excel files at that website (listed below), which you should see inside a box, just below the headings “Available Downloads” and “Excel Tables (2005 Data)”.  Each file is also posted in the folder “Homework #2 material”, which is in the Course Documents section of Blackboard.

http://www.ers.usda.gov/Data/InternationalFoodDemand/Index.asp?view=CPF#IFD

Here are the files you’ll be accessing:

i. Income Elasticities for Broad Consumption Categories, 144 Countries, 2005

ii. Uncompensated Own-price Elasticity for Broad Consumption Groups, 144 Countries, 2005

iii. Income Elasticities for Food Subcategories, 144 Countries, 2005

 

Both of these files reports elasticity estimates for various goods in many different countries.  Note that within each question, there is only one correct answer.

 

5. Locate the file with income elasticity estimates that’s referenced above (file i) and find the income elasticity estimate for Medical & Health in African countries like Burundi, Liberia and Zimbabwe.  The most accurate interpretation of the income elasticity estimates in these countries is that medical and health expenditure in many African countries is a(n):

(a)    elastic good

(b)   inelastic good

(c)    normal good

(d)   luxury good

(e)    necessity

(f)    inferior good

(g)   normal good and necessity

(h)   normal good and luxury good

(i)     substitute good

(j)     complement good

(k)   elastic good and necessity

(l)     inelastic good and necessity

 

 

6. Locate the file with own-price elasticity estimates (file ii) and find the own-price elasticity estimate for Education in African countries like Burundi, Liberia and Zimbabwe.  The most accurate interpretation of the own-price elasticity estimate in these countries is that education is a(n):

(a)    elastic good

(b)   inelastic good

(c)    normal good

(d)   luxury good

(e)    necessity

(f)    inferior good

(g)   normal good and necessity

(h)   normal good and luxury good

(i)     substitute good

(j)     complement good

(k)   elastic good and necessity

(l)     inelastic good and necessity

 

 

7. Locate the file with income elasticity estimates for food subcategories (file iii) and find the income elasticity estimate for Bev & Tobacco (beverages and tobacco products), and the income elasticity estimate for Meat in the country of Burundi.  If income for the average citizen in Burundi increases by 10%, then by how much does the expenditure in Burundi change for the average citizen on items like beverages and tobacco products, and meat?

(a)    increase in expenditure on Beverages & Tobacco by 23.5%, increase in expenditure on Meat by 8.32%

(b)   increase in expenditure on Beverages & Tobacco by 2.35%, increase in expenditure on Meat by 8.32%

(c)    increase in expenditure on Beverages & Tobacco by 47%, increase in expenditure on Meat by 16.64%

(d)   increase in expenditure on Beverages & Tobacco by 4.7%, increase in expenditure on Meat by 1.66%

(e)    increase in expenditure on Beverages & Tobacco by 42.5%, increase in expenditure on Meat by 120.2%

(f)    increase in expenditure on Beverages & Tobacco by 4.25%, increase in expenditure on Meat by 12%

 

 

8. Assume that the demand and supply curves for good A are given as the equations you see below.  Note: please read the instructions above about rounding your answers.  Note also that you will be using these equations to not only answer parts a and b below, but also Question #9 below.

 

Demand:

P = 500 - 4Qd

(Qd = quantity of A demanded, P = price)

Supply:

P = 300 + Qs

(Qs = quantity of A supplied)

 

a.  What is the equilibrium quantity in this market?

b.  What is the equilibrium price in this market?

 

 

9. Recall that you will be using the equations from Question #8 above in answering this question.  Assume that government has placed a price floor on the market for good A.  If the price floor is set at $460, then which one of the following (direct) effects is the most likely to occur:

 

(a)    No effect (i.e. no shortage, no surplus)

(b)   Shortage of 10 units

(c)    Surplus of 10 units

(d)   Shortage of 30 units

(e)    Surplus of 30 units

(f)    Shortage of 120 units

(g)   Surplus of 120 units

(h)   Shortage of 150 units

(i)     Surplus of 150 units

(j)     Shortage of 160 units

(k)   Surplus of 160 units